By Claire West

The Lloyds TSB Spending Power Report for May reveals that consumers' confidence held onto recent improvements in May, with the Consumer Sentiment Index remaining high at 108 points. This is one point down from last month, which was the highest level of consumer sentiment for over two years.

Greater optimism towards the current economic situation is the key driver of improved sentiment, with people getting used to the environment appearing more stable. Views on the housing market, utilities, personal finances and the UK's financial situation are set out below. Meanwhile, spending on essential items continues to grow at a steady pace of around 2%, broadly in line with wider inflation, meaning that the squeeze on spending power for non-essential spending has eased since last year.

Within essential spending, annual growth on food and drink spend - the largest component within the essential spending category - continued to fall to around 2.5% from 3% in April. Consumer research[i] indicates that households spent on average £268 on groceries in May - down by £7 from £261 in April.

By comparison, annual spending growth on gas and electricity continued on an upwards trajectory in May, rising to around 7% from just over 5% in April. Following the yearly high in April, the proportion of people that feel concerned about rising food and utilities prices have stabilised this month. 76% of people stated that food prices are amongst their biggest concern with a similar proportion, 79% stating gas and electricity prices. Fears about fuel prices remain steady at 63% of people being concerned about an increase in prices (from 64% in April), as growth in spending on fuel fell back further to around 0.5% this month, compared with close to 1% in April.

Patrick Foley, chief economist at Lloyds TSB, says:

"The recent reports of a return to growth for the UK economy are being reflected in improved consumer sentiment, which is good news as better confidence will help to sustain the economic recovery. A gradual easing in the squeeze on consumers from essential spending is helping, although with energy bills increasing again, the improvement in spending power remains modest."